German bourse offers a lesson in expansion

Deutsche Börse operates in a country with limited experience of equity trading and a tiny local stock market in relation to the size of the economy.

The London Stock Exchange, by contrast, can trace its history back about 300 years to City coffee houses such as Jonathon's and Garraway's. It is more than three times as large as Deutsche Börse, as measured by the size of its listed companies.

How is it, outsiders may ask, that a German firm is threatening to take over this British institution?

The answer lies in the diversification strategy - and the generally international outlook - pursued by the Swiss head of the German exchange, Werner Seifert.

Mr Seifert has followed an expansionary approach called vertical integration - acquiring companies with complementary activities up and down the commercial chain of trading financial assets, which are not direct rivals. This has taken Deutsche Börse from its core business of trading cash equities into trading derivatives, such as futures and options, and then into the clearing and settlement of trades.

"This is a tremendous advantage," says Wolfgang Gerke, who teaches banking at the University of Tübingen in Germany. Controlling those two services make the company more independent from the ups and downs of the equities market, Gerke adds.

More visibly, the strategy has produced a company with a market value of €4.8bn (£3.3bn) against the £1.4bn value attributed to the LSE.

While Deutsche is best known for its Xetra trading service, it has a joint venture with the Swiss exchange, SWX, to run Eurex, the world's largest futures and options exchange. It also owns Clearstream, which acts as an administrative clearing house for trading financial assets throughout Europe.

The LSE, by contrast, has always spoken of "horizontal integration" being the way forward - a vision of tightly comparable trading businesses across various European centres getting together to create a unified pan-European marketplace through that companies can raise cash.

Three years ago, however, the LSE failed in its plan to make this horizontal vision a reality: the institution was rebuffed in its attempt to take over the Liffe futures exchange in London, which instead threw in its lot with continental rival Euronext, a merger of the stock markets of Paris, Amsterdam, Brussels and Lisbon.